March 29, 2020

Small Business Act Loans Under the CARES Act

Written by JHM

On Friday, March 27, 2020, President Trump signed the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) into law. The magnitude of the CARES Act is in excess of $2 trillion and represents the largest economic stimulus package in history. A substantial portion of the Act is designed to provide relief to workers and businesses impacted by the current COVID-19 crisis.

We will be continually monitoring additional guidance as it is released and will provide updated information on this page as it becomes available.

Title I of the CARES Act bill, “Keeping American Workers Paid and Employed” provides resources intended to sustain small businesses with less than 500 employees, including sole proprietorships and most nonprofit organizations. This relief is predominantly provided in the form of what are known as “7A Loans,” so-called because they derive from section 7(a) of the Small Business Act. The Small Business Administration under this section will now have access to approximately $350 billion in loans during the covered period, February 15, 2020 through June 30, 2020. Eligible organizations can apply for “paycheck protection loans” that are fully guaranteed by the Federal Government through December 31, 2020 (returning to an 85% guarantee for loans greater than $150,000 after that date).

The paycheck protection loans are generally limited to the lesser of:

  • the sum of average monthly “payroll costs” for the one-year period ending on the date the loan was made, multiplied by 2.5
  • $10 million

For the purposes of calculating the maximum loan amount, “payroll costs” is defined as not including compensation exceeding $100,000 for any employee, and include the sum of the following:

  • wages, commissions, salary, or similar compensation to an employee or independent contractor
  • payment of a cash tip or equivalent
  • payment for vacation, parental, family, medical or sick leave (except for leave paid under the “Families First Coronavirus Response Act”)
  • allowance for dismissal or separation
  • payment for group health care benefits, including premiums
  • payment of retirement benefits
  • payment of state or local tax assessed on the compensation of employees

Organizations must certify that the loan is necessary because of the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicate funds for the same uses.

Payroll protection loans will have maximum maturities of 10 years and bear interest not to exceed 4%. The loan proceeds may be used to cover the following business expenses:

  • payroll
  • costs related to group health care benefits
  • employee salaries, commissions, or similar compensation
  • mortgage payments
  • rent (including rent under a lease agreement)
  • utilities
  • interest on other debt obligations

No personal guarantee is required by the loan applicant. Also, Section 7 of the Small Business Act standard fees are waived.

There is an additional provision for possible deferment of repayment of the loans for a period of at least six months, but not to exceed a year.

Section 1106 of the CARES Act, Loan Forgiveness, outlines that a portion of the paycheck protection loan discussed above is eligible to be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week covered period beginning on the date of the loan:

  • payroll costs (as defined above)
  • mortgage interest
  • rent
  • certain utility payments
  • A borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments in order to seek debt forgiveness

The amount of the loan that may be forgiven is decreased if the borrower either reduces its workforce during the 8-week covered period when compared to other periods in either 2019 or 2020, or reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the 8-week covered period.

This loan forgiveness reduction can be avoided, however, if the borrower rehires or increases the employee’s pay within an allotted time period, beginning on February 15, 2020 and ending on the date that is 30 days after the enactment of the CARES Act.

Organizations must apply for loan forgiveness to their lenders by submitting required documentation and will receive a decision within 60 days. If a balance remains after the organization receives loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness.

Nonprofits organized under sections other than 501c(3) and 501c(19) are excluded from payroll protection loan relief but may qualify for other recent economic relief alternatives.

For payroll protection loans, small businesses will need to compile a wealth of information and begin the process with an SBA-authorized bank.

Please let your JHM contact know if you have additional questions. We will do our best to help in anyway necessary.